Supply Chain Management (SCM) has become an extremely powerful competitive advantage for business units engaged in creating, distributing, and selling products. The implementation of practices related to supply chain management promotes improvements in responsiveness and flexibility of an organization.
Being influenced by economic and social transformations, the supply chain paradigm is gradually evolving. The essence of contemporary supply chain management (SCM) reflects the urgent need to make decisions and develop strategies, which are aimed at satisfying of various economic interests according to global, local, and, a priori, personal objectives of a company. Today, business environment is becoming extremely complicated under global, national, and regional circumstances. However, although a wide spectrum of managerial models of supply chain is well researched, all SCM-associated initiatives should be based on comprehensive assessment of external and internal conditions of an organization in order to select and implement the most beneficial efforts.
Strategic Issues of Sourcing
Sourcing (procurement/purchasing/buying) is one of the major supply chain management processes. The primary goal of sourcing is to apply flexible business processes to a given situation and, thus, “achieve speed, flexibility, and competitive advantage in the marketplace”. Sourcing includes the following operations:
- Purchasing raw materials and packaging
- Contracting out utilities and maintenance
- Hiring contract or casual labor
- Selecting approved or dedicated suppliers
- Use of professional services.
Although objectives of sourcing are well understood, this business practice requires the thorough development of strategic sourcing plans, participation of all supply chain members, collaboration with suppliers, and management of suppliers. Management of suppliers involves an integrated system of methods, principles, means and forms of leading, planning, operating, organizing, controlling and staffing. Today, relationships with suppliers differ greatly from their former types; this managerial practice is essentially more complicated than the traditional models applied within many decades due to new economic conditions of globalization and growing competitiveness in all industries. Furthermore, Burt et al. (2009) identifies other sourcing-associated strategic issues. Those include:
- Early Supplier Involvement;
- Supply Base Reduction;
- Single Versus Multiple Sourcing;
- Share of Supplier’s Capacity;
- Local, National and International Sourcing;
- Manufacturer or Distributor;
- “Green” Supply Management;
- Minority- And Women-Owned Business Enterprises;
- Ethical Considerations;
Being underestimated, strategic issues of sourcing can induce financial losses and failures of an organization. In order to avoid potential losses and succeed in performing international business operations, professionals involved in the contemporary practices of supply chain management should determine and utilize supply strategies of their organization, taking into consideration restrictions of economic, social, managerial, environmental, and cultural character.
Early Supplier Involvement
Management of relationships with suppliers has become a particular focus of attention. Efficient procurement is a pledge of profitability, high quality production, and investments into the business development. In order to increase the effectiveness of sourcing, it is imperative to implement a consistent approach to the integration of suppliers into supply chain management (SCM). In accordance with benefits of Early Supplier Involvement (ESI) identified by Burt et al. (2009), this strategy stipulates the development of technological processes, optimization of the design and cycle time, growth of order quantities, inventory reductions, improvements in procurement, packaging, and transportation. Furthermore, information sharing, collaboration for a common forecast, and common planning associated with Early Supplier Involvement contribute to the profitability of organizations.
Suppliers are generally identified as important components of external resources of the development of an organization. “The numbers of suppliers available, plus a range of tiered contract structures, are critical to meeting the need for flexibility”. Early Supplier Involvement (ESI) is a strategic approach that effectively links sourcing to the overall goals of an organization.
Early Supplier Involvement in the development, design, and modernization of goods and services leads to the significantly faster introduction of a new product into the market and decrease in its cost. Early collaboration with suppliers’ design, consulting, and research divisions reduces production cycles and manufacturing expenses. Besides, earlier involvement of suppliers allows a company to develop specific products or improve standard ones. ESI in the process of product design optimizes support of life cycle of manufactured goods. Early supplier integration provides companies and their suppliers with possibilities of the development of new products or improvement of existing items and utilization of the newest research findings. The simultaneous collaborative initiatives and efforts provide partners with viable opportunities to increase quality of goods, improve design of products, and facilitate the functioning of all subsystems of supply chain; consequently, ESI saves time and means. Furthermore, “Sharing transactional data with suppliers and customers can lead to expanded sales opportunities for everybody”.
The earlier suppliers are involved in supply chain, the more willingly they invest in innovative solutions and advanced technologies. Practices of ESI increase suppliers’ confidence in stability of their cooperation with buyers. Reliable and transparent collaboration promotes mutual trust and results in the growth of productivity. “It is important to raise the standards of suppliers as well as learn from them by working in partnership with them”. The increased qualification and culture of team allows both consumers and suppliers to benefit from the application of their shared knowledge and experience. Continuous personnel training, close interactions of people from different organizations, and obtained knowledge increase their professional skills and competences.
Methods of Early Supplier Involvement should be based on the comprehensive market research, objective assessment of potential suppliers’ strengths and weaknesses, continuous search for new opportunities to reduce expenses, and constant supervision of the overall effectiveness of collaborative efforts so that an organization can benefit from the implementation of this strategy.
Supply Base Reduction
Contemporary trends of supply base reduction are induced by the creation and rapid expansion of supply networks, growing expectations related to suppliers, and an increase in modules and systems in SCM. Today, organizations generally cooperate with a far smaller number of suppliers than it was in the past. Marquez states that “in most cases many of the potential links are eliminated because there are closer relationships with some companies, depending on the nature of the product, price and capacity of the supply network”. The strategy of supply base reduction increases leverage with suppliers and promotes agile supplier integration into the product development. According to Burt et al. (2009), companies achieve supply base reduction by reducing variety and increasing consolidation.
Effective supply managers should be able to deal with diverse issues, complexity, change, and uncertainty, be high tech and high touch, work independently and interdependently, and consider goals of their organization to be the highest value. In order to make supply base reduction profitable, an organization should take into consideration a supplier’s technical, operations, financial, and managerial capabilities (Basu &Wright 2008). The determination of requirements for a vendor and selection criteria should precede supply base reduction. “To rate and identify the most attractive suppliers, buying centers often use a supplier-evaluation model”.
The strategy of supply base reduction should not be implemented in isolation from other managerial practices and strategic goals of an organization. The process of supply base reduction should be performed in order to achieve the following objectives:
- To lower costs of products;
- To establish beneficial correlations between supply and demand;
- To control inventory;
- To decrease administrative expenses related to procurement and logistics;
- To reduce a total cost and minimize potential risks;
- To improve negotiations with suppliers and optimize supply contracts;
- To select the most preferable suppliers in conformity with the determined selection criteria and conclude beneficial contracts;
- To achieve the lowest possible price;
- To utilize suitable practices of monitoring and feedback mechanisms;
- To facilitate data collection and data analysis;
- To increase leverage with suppliers.
An organization can complete a list of preferred suppliers in accordance with its specific requirements. “This provides useful contacts regarding reliable companies who are known to deliver as per specification of quality”. Such a list should include suppliers who can be involved at any stage of the product development.
Manufacturer or Distributor
An organization is free to select and apply methods of distribution, which are the most appropriate to its structure and business operations due to the absence of official limitations concerning this managerial activity. In order to regulate and optimize product costing, warehouse operations, stock management, and transportation, companies can cooperate with both distributors and manufacturers. However, companies should precisely monitor the efficiency of their distribution channels in order to avoid losses, deliver products on time, and meet diverse customers’ requirements.
The necessity to ensure supply chain order fulfillment predetermines the choice between manufacturers and distributors. Cooperation with global, national, regional and local distributors appears to be much more effective than cooperation with manufacturers. Distributors are able to render considerably better and more various services, which can be modified according to the needs specific to consumers while manufacturers generally adhere to rigid standards, which do not frequently satisfy some ultimate customers. Burt et al. (2009) identify such benefits of a distributor over a manufacturer as the economy of scale, reduction of orders and paperwork, special services, credits, and technical advice. Furthermore, there are some more arguments in favor of distributor involvement. Those include:
Distributors possess sufficient professional knowledge, skills, and experience in the field of the product delivery from manufacturers to consumers.
Being utilized within a long-term period, economies of scale provide entrepreneurs with opportunities to establish beneficial equilibrium between profits and expenditures through unit cost reductions, fixed costs over a large volume of products, advanced equipment, and highly qualified labor force.
Distributors possess various assets (buildings, material handling equipment, and transport vehicles) to store and deliver goods.
Well developed and streamlined business of distributors provides organizations with “the opportunities for both present and future business through an appropriate mix of the channels of distribution”.